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For US mills, the main mission now is damage control

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One of the largest federally mandated programs ever is coming down the pike and it will impact every aspect of U.S. steelmaking.

It's expected to become the law of the land soon after a new president moves into the Oval office. When the law is signed, as most expect it will be in early 2009, U.S. manufacturers will have to cap their emissions, probably at 2009 levels. At that point, depending on the bill's language, they will either be sold or given emissions "credits." The credits will be bought and sold among emitters, and as the price of carbon rises so too will the incentive to accumulate more credits. It will be in the economic interest of manufacturers, therefore, to reduce their emissions and thereby save the planet from the catastrophic impacts of global warming.

While the idea of cap and trade is simple—the system's goal is to reduce carbon emissions, the leading contributor to global warming—drafting the bill, not to mention its implementation, could be a nightmare.

Europe, the first to implement a cap-and-trade program, made significant mistakes right out of the gate. It gave away too many credits for free, and the price of a ton of carbon has suffered as a result. The U.S. Congress would rather get it right the first time, and its main legislative vehicle, the Lieberman-Warner bill, is expected to come up for vote in the Senate in June.

Despite their best efforts to stop it, steel producers have mostly accepted the idea that there will be a mandatory cap-and-trade program. Steel industry lobbyists are now focusing on how to get the best possible deal and are spending a lot of money to try to steer the legislation in their favor.

But a battle may be brewing between the two major groups of producers, according to sources. Because of their blast furnaces, integrated steel companies like Pittsburgh-based U.S. Steel Corp. and ArcelorMittal SA, Luxembourg, produce more emissions than mini-mills with electric-arc furnaces.

The growth of recycling and the widespread deployment of electric-arc furnace technology in the United States since the early 1980s are major reasons for the declining carbon footprint of the U.S. steel industry, Jim Slattery, a trade attorney, told Congress in March.

American steelmakers emit an average of only a little over 1.2 tons of greenhouse gases per ton of steel produced, according to the American Iron and Steel Institute (AISI). Mini-mills produce about 0.6 ton while the integrateds produce about 1.7 tons.

On average, steel producers around the world emit more than 1.7 tons of greenhouse gases, directly and indirectly, for every ton of steel produced. China, the world's largest steel producer, emits maybe three times that amount, although sources say data on Chinese emissions is incomplete.

Today, the production of steel accounts for less than 2 percent of total U.S. greenhouse gas emissions. According to the U.S. Environmental Protection Agency, the steel industry directly emitted 86.2 million tonnes of CO2 in 1990. In 2005, those emissions totaled 46.2 million tonnes, a reduction of nearly 50 percent even though steel production in 2005 was more than 7 percent higher than in 1990.

As it currently stands, the cost impact of the Lieberman-Warner bill would be about three times greater on integrated mills, where emitting carbon is a necessary part of the process of making steel. "We are condemned to create CO2 no matter how much anyone tells us to stop it," one integrated producer said.

The integrated producers want the bill to acknowledge that inevitability, and one steel industry lobbyist said they are making progress getting so called "process emissions" exemptions included in the bill. Cap and trade also encourages manufacturers to increase their energy efficiency, but that's something integrated producers say they have already "maxed out" on.

But that doesn't mean the bill lets mini-mills off the hook. Electric-arc furnaces suck up a great deal of electricity, more than half of which comes from burning coal. Cap and trade likely would raise the price of traditional energy sources like coal in order to promote increased use of renewable and clean energy technologies. To help offset this, the mini-mills want a recycling credit put into the bill.

At closed-door meetings of the American Iron and Steel Institute (AISI) in Washington, the mini-mills and integrateds are discussing ways for the cap-and-trade pain to be evenly distributed so that the balance of U.S. production remains at its current level of 60 percent mini-mill and 40 percent integrated.

But the mini-mills also see an opportunity to get a leg up on their integrated competitors, and one source said the temptation for them to let that happen is great. Still, the mini-mills realize they need the integrateds—after all, if the integrateds went out of business completely the minis would eventually face a serious scrap shortage.

Publicly, however, the mini-mills say they are in arm-and-arm with the integrateds.

Thomas Danjczek, president of the Steel Manufacturers Association, agrees. "It's not winners and losers, it's just losers and bigger losers," he said.

Duke Energy Corp., Charlotte, N.C., one of the country's largest generators of electricity, predicts that a cap-and-trade program could cause electricity prices in the Duke service area to rise by 53 percent by 2012.

The AISI, meanwhile, is funding research on an ironmaking process called hydrogen flash smelting, which doesn't use carbon as a fuel and therefore produces no carbon dioxide emissions. That technology is still in the research phase, however.

The integrateds have at least one advantage over the minis some of them already operate under the European cap-and-trade system. "U.S. Steel's European operations (in Slovakia) are currently regulated under the EU (emissions trading system)," Scott Salmon, director of government affairs at U.S. Steel, said.

Another concern that cuts across the production chasm is how to keep U.S.-produced steel globally competitive since most of the rest of the world doesn't have a cap-and-trade system. One answer is to tax imports at a level that reflects what they would have cost to produce under U.S. laws. That's a problematic solution, however, and would certainly invite challenges at the World Trade Organization. Still, without some border-adjustable component, producers fear production would move overseas.

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